Since the outset of the global economic crisis, governments have rescued companies and industries deemed too large or important to fail.

As public opinion has mounted against these handouts, politicians have looked for ways to help struggling industries without attracting public scorn. Perhaps the most prominent of these efforts are the so-called “cash for clunkers” subsidies which have been implemented in almost a dozen European countries, the United States, China and Mexico.

The basic scheme has governments providing consumer vouchers for trading in older, high-pollution vehicles that can be put towards the purchase of newer, theoretically lower-polluting vehicles.  The idea seems like a win-win for car companies, dealers, consumers and the environment.

However, analysts have charged that the cash-for-clunkers schemes, which are often designed by auto industry lobbyists, are being used to dress up as environmentally friendly policy what amount to auto industry bailouts.

The United States’ program, which began in January 2009, was billed as being both good for the environment and the ailing auto sector.

Yet as Senator Feinstein, who co-sponsored the original bill, admitted in a June 22 column entitled “Handouts for Hummers”, the bill that came out of the House of Representatives was “tailored perfectly to the auto industry's specifications.”

The final Car Allowance Rebate System (CARS), which went into effect in late July, gave customers US$3,500 towards the purchase of cars that provided a mere 4 miles per gallon (mpg) improvement in fuel efficiency over the clunkers they traded in, and US$4,500 for a 10 mpg improvement.  With trucks the results were even worse, allowing combinations that offer a single mpg improvement to qualify for US$3,500.

The program was so successful in attracting buyers that the US$1 billion originally allotted to it ran out in a week, leading Congress to approve another US$2 billion on 6 August 2009.

Bill Chameides, Dean of the Nicholas School of the Environment at Duke University, says that in principle taking cars with higher emissions off the road and replacing them with cars with lower emissions will eventually lead to lower overall emissions.  

But first a new vehicle must "payback" its manufacturing emissions by its lower annual emissions compared with the vehicle it has replaced.  On average the manufacture of a new car creates between 3 to 12 tonnes of CO2 per vehicle.

According to Dr. Chameides’ calculations, the average new car bought under the cash for clunkers bill would take 5.5 years to pay back, assuming a 4 mpg gain in fuel efficiency. With trucks the payback time would be longer because the requirements are less stringent.

Dr. Chameides argues that if the U.S. Congress was serious about the environment it would not have enacted a bill that allows for new cars to qualify with a minimum of 22 mpg (11 litres per 100 km*) when the current Corporate Average Fuel Economy (CAFE) Standards is already at 27 mpg (9 litres per 100 km).

He also points to other environmental impacts associated with the program such as the mining of ore for new cars and the disposal of toxic components in the old cars. “In general encouraging people to buy new stuff and throw away old stuff is not good from an environmental point of view,” he concludes.

At the same time, the benefits to the auto sector and the economy as a whole have been questioned. Richard Feinberg, professor of retail management at Purdue University, says that consumers who take advantage of the programs will now be spending less elsewhere in the economy at an estimated amount of US$300 million a month, leaving a dent in the important retail sector. “Moving money from monthly paychecks to pay down payments and interest on car loans is a terrible idea for stimulating the economy,” he says.

In terms of economic benefits, it would have been better to pick 750,000 families at random and given them each US$4,500 to spend, concludes Professor Feinberg.

The United States is not alone, however, in offering consumer vouchers to encourage the purchase of new cars: 11 European countries, China and Mexico have similar programs.

In Mexico consumers are eligible for 15,000 pesos (approximately US$1,150) in vouchers for scrapping cars that are at least 10 years old. There are no fuel-economy requirements placed on the new vehicles, meaning that theoretically the program could fund the acquisition of more polluting cars.

Héctor Vázquez Tercero, a Mexican political analyst and founding partner at Mexico City-based Vázquez Tercero and Associates, says the Mexican plan is an auto industry stimulus bill in which the environmental component is not important.

The program will fail to remove the biggest polluters from the road because these cars often lack the required ownership documentation. Moreover, poor people that own these cars would not be able to afford new vehicles with the mere 15,000 pesos subsidy, explained Mr. Vázquez.

In Europe, Germany’s plan has garnered the most attention as it is being credited with a 40% increase in auto sales in that country in March. Under the plan consumers receive €2,500 for replacing cars that are at least 9 years old with cars the meet the Euro IV emission standards established in 2005.

In Ontario, Canada Premier Dalton McGuinty announced in July that his government would offer up to CA$10,000 to consumers who purchase electric cars. As Toyota points out, however, the Premiere made his announcement at a GM Canada plant where the electric GM Volt is being built. This raises questions about the reasons for the subsidy given that Ontario owns a stake in GM Canada, acquired after helping bailout the company earlier in the year.

*Editor's note: Translating a change in miles per gallon (MPG) to the standard international metric, litres per 100 kilometres, is not straightforward, and depends on one's starting point. But assuming an average of 22 mpg (11 litres per 100 kilometres) of the vehicle being traded in, a 4 mpg improvement would correspond to a 1.6 L/100km reduction in the rate of fuel consumption, and a 10 mpg improvement would correspond to a 3.5 L/100km reduction in the rate of fuel consumption.